The View From 1776

The Raw Deal

President Franklin Roosevelt’s New Deal was a stain on the fabric of civilized society.

Numerous posting on this website have described the depredations of President Roosevelt’s New Deal, which collectively qualify Mr. Roosevelt for the title of most destructive President in our history.

He was supremely an egotist, who fancied himself as someone without whom the nation could not function. Only he had the presumption to run for the office four times.

After less than thirteen years (he died at the outset of his fourth term in office), Mr. Roosevelt left a United States transformed into a socialistic nanny-state that upended the founding ethos of the nation. Instead of a Federal government with Washington’s power circumscribed by the police powers of state and local governments, he bequeathed us a monstrous, ever-growing Federal Leviathan.

In the Wall Street Journal, Amity Shlaes gives us an overview of a disastrous presidency. Journal online subscribers can access it here.

The Real Deal
By AMITY SHLAES

June 25, 2007;?Page?A15

The late Arthur Schlesinger, Jr. was a true liberal—a man who welcomed debate. Just before he died this winter, he wrote, quoting someone else, that history is an argument without end. That, Schlesinger added, “is why we love it so.”

Yet concerning Schlesinger’s own period of study, the 1930s, there has been curiously little argument. The American consensus is Schlesinger’s consensus: that FDR saved democracy from fascism by co-opting the left and far right with his alphabet programs. Certainly, an observer might criticize various aspects of the period, but scrutiny of the New Deal edifice in its entirety is something that ought to be postponed for another era—or so we learned long ago. Indeed, to take a skeptical look at the New Deal as a whole has been considered downright immoral.

The real question about the 1930s is not whether it is wrong to scrutinize the New Deal. Rather, the question is why it has taken us all so long. Roosevelt did famously well by one measure, the political poll. He flunked by two other meters that we today know are critically important: the unemployment rate and the Dow Jones Industrial Average. In his first inaugural address, Roosevelt spoke of a primary goal: “to put people to work.” Unemployment stood at 20% in 1937, five years into the New Deal. As for the Dow, it did not come back to its 1929 level until the 1950s. International factors and monetary errors cannot entirely account for these abysmal showings.

When I went back to study those years for a book, I realized two things. The first was that the picture we received growing up was distorted in a number of important regards. The second was that the old argument about the immorality of scrutinizing the New Deal was counterproductive.

The premier line in the standard history is that Herbert Hoover was a right-winger whose laissez-faire politics helped convert the 1929 Crash into the Great Depression. But a review of the new president’s actions reveals him to be a control freak, an interventionist in spite of himself. Hoover signed the Smoot-Hawley Tariff Act, which worsened a global downturn, even though he had long lived in London and understood better than almost anyone the interconnectedness of markets. He also bullied companies into maintaining high wages and keeping employees on their payrolls when they could ill afford to do so. Perhaps worst of all, he berated the stock market as a speculative sinner even though he knew better. For example, Hoover opposed shorting as a practice, a policy that frightened markets at an especially vulnerable time.

The second standard understanding is that the Brain Trusters were moderate people who drew from American history when they wrote the New Deal. If their philosophies were left wing, then that aspect ought to be treated parenthetically, the attitude was. But the leftishness of the Brain Trust was not parenthetical. It was central.

In the summer of 1927, a group of future New Dealers, mostly junior professors or minor union officials, were received by Stalin for a full six hours when they traveled on a junket to the Soviet Union. Both Stalin’s Russia and Mussolini’s Italy influenced the New Deal enormously. The Brain Trusters were not, for the most part, fascists or communists. They were thoughtful people who wrote in the New Republic. But their ideas were wrong. Their intense romanticization of the concept of the economy of scale ignored the small man. One of the New Dealers from the old Soviet trip, Rex Tugwell, even created his very own version of Animal Farm in Casa Grande, Ariz. As in the Orwell book, the farmers revolted.

The third familiar story line in the received wisdom about the New Deal is that, while it may not have been perfect, it did inspire the American people and tide them over. Here the emphasis is wrong. Roosevelt’s radio voice may have inspired—yes. But the New Deal hurt the economy, and that mattered more. At some points Roosevelt seemed to understand the need to counter deflation. But his method for doing so generated a whole new set of uncertainties. Roosevelt personally experimented with the currency—one day, in bed, he raised the gold price by 21 cents. When Henry Morgenthau, who would shortly become Treasury Secretary, asked him why, Roosevelt said that “it’s a lucky number, because it’s three times seven.” Morgenthau wrote later: “If anybody ever knew how we set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”

The centerpiece of the New Deal, the National Recovery Administration (NRA), was perverse. The premises of its codes were ones anyone would reject outright today—the concept that price cutting caused deflation, for example. Everyone, even Roosevelt’s own agonized advisers, understood this. The poet Ogden Nash wrote a poem that captured the inanity—its title was “One from One Leaves Two”:

Mumblety-pumbledy my red cow
?She’s cooperating now
?At first she didn’t understand
?That milk production must be?planned
?She didn’t understand at first
?She had to either plan or burst

A think tank produced a report of 900 pages in 1935 concluding the NRA “on the whole retarded recovery” (that think tank was the Brookings Institution). Some of the great heroes of the period were the Schechter brothers, kosher butchers who fought the NRA all the way to the Supreme Court and won. Their case was not only jurisprudential but also based on common sense—management from above was killing recovery. The Schechter case is as important to history, as, say, the Gideon case that Anthony Lewis wrote about in his great book about the right to counsel, “Gideon’s Trumpet.” Where is the “Gideon’s Trumpet” for free marketeers?

The fourth rule we learned is that Roosevelt’s call to “bold, persistent experimentation” was, on balance, good. But this conviction ignores the cost of uncertainty, as the economic historian Robert Higgs first pointed out. Today we know that unknown unknowns are inherently destabilizing. Roosevelt, a man of impulses, changed policies routinely. He moved from supporting big business to attacking it to supporting it again, many times in his presidency.

On some days, as Anne O’Hare McCormick, a Maureen Dowd of her time, wrote during FDR’s second term, Roosevelt was the personification of “the Dutch householder who carefully totes up his accounts every month and who is really annoyed, now that he is bent on balancing the budget, when Congress can’t stop spending.” Other days he was a big spender.

Uncertainty caused markets to freeze in fear; so did investment—the old New Yorker cartoons of the plutocrats in the salon were true. Yet Roosevelt counterattacked by compiling lists of the wealthy to prosecute—his administration prosecuted the Alan Greenspan of the day, Andrew Mellon, until Mellon died. Roosevelt’s administration pushed a plan for an undistributed profits tax to eat the essence out of companies. Policies like this caused the most unnecessary part of the Depression: the Depression within the Depression of the late 1930s.

The final line in the traditional story is that Roosevelt’s government offices were somehow better than their private sector counterparts—when it came to utilities, for example, we learned that only the federal government could electrify backward rural areas. This is a false memory, for there was a company that already planned to light up the South, Commonwealth and Southern. David Lilienthal of the Tennessee Valley Authority set out to gut it, and succeeded. But the battle over electric power was also, literally, a power struggle between coequals, not a contest between a good policeman and a sinning company.

The most useful economic philosophy for understanding what went on is not Keynesianism. It is the public choice theory of James Buchanan and others, which says that government is a competitor that will annihilate what comes in its path.

So why has it taken so long to revisit this period? The first reason is that the Great Depression was a disaster. From the Crash to the Dust Bowl and the floods, it all felt like a permanent Katrina, and Americans suspended disbelief. But the reality was that the depression did not mean permanent Katrina—indeed, we see now that that downturn was the exception in the century, not the rule.

The next reason we hesitate is World War II. War always trumps economics. New Deal critics were right on the economy, but they were wrong in their estimations of Hitler. To write sympathetically about the Liberty Leaguers is seen, even today, as siding with the appeasers. The incredible rightness of FDR’s war policy obscures the flaws in his prior actions.

The Cold War also played a role in delaying examination of the 1930s. Nearly all writers today—whether they write policy or history—make a point to avoid being classed with Sen. Joseph McCarthy and the House Un-American Activities Committee. But that fear of being labeled as a red-baiter prevented the necessary discussion of the counterproductive policy of the 1930s.

In the Cold War, there was also the assumption that Europe certainly, or even the U.S., might conceivably go communist. The premise therefore was that safety nets—from Social Security in the U.S. to codetermination in German boardrooms—were necessary to prevent such an event. Bismarck’s social democracy and Roosevelt’s New Deal were therefore glorified as justified.

In the past half-century, we have learned that much of our capital comes from the private sector, not the public sector, and that most of our growth inheres in the private sector. After the 1980s and 1990s we know that markets can do much of the work that Roosevelt believed only government capital could do.

My own sense is that there is a final reason we have all paused at the New Deal—a generational one. To insult the New Deal is to insult the Social Security that we, our parents, or grandparents receive. The Baby Boomers have a reputation as being selfish. But their reverence in regard to Social Security, not to mention Medicare Part D, is overly unselfish, and comes out of misplaced filial piety. Younger Baby Boomers and the generations after them will doubtless pay higher taxes because of our current unwillingness to criticize entitlements. Americans owe them as much as we owe senior citizens.

After all, the argument of markets has its own powerful morality. It is immoral to cause unemployment by pretending that a big government policy is morally necessary. When Andrew Mellon and Calvin Coolidge put through their tax cuts in the 1920s, they made the efficiency argument that supply-siders make today: lower rates could yield, they posited, higher revenues. But they also had a moral argument: high taxes were wrong, confiscatory and illiberal, in the classical sense. You can acknowledge this without being a Roosevelt-hater.

Schlesinger, who so often contributed to these pages, has already issued the invitation. It is more than time that the rest of us took him up on his offer.

Miss Shlaes, a Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations, is author of the just-published “The Forgotten Man: A New History of the Great Depression” (HarperCollins), from which this is adapted.